Legal Lookout November 2008
Son of the Sompo Japan Slip-Up: Second Circuit holds COGSA governs ocean carrier and NVOCC liability for inland loss.
by Steve Block
Here’s an example of the complicating and counterproductive ripple effects of the Second Circuit’s erroneous 2006 decision in Sompo Japan Ins. Co. of America v. Union Pacific R. Co. (“Sompo Japan”).
You’ll recall that in Sompo Japan, the Second Circuit issued a decision that is completely at odds with the U.S. Supreme Court’s pronouncement in Norfolk Southern Railway Co. v. Kirby (“Kirby”). Kirby had found enforceable extension of the U.S. Carriage of Goods by Sea Act (“COGSA”) – by way of standard Himalaya Clauses found in most ocean and through bills of lading – to losses occurring during the inland leg of through transit. The decision considered that the subject bill of lading “required a substantial carriage of goods by sea” in concluding that admiralty jurisdiction, and therefore COGSA, applied to the whole deal. Kirby specified numerous industry and public policy rationales as to why that approach was most equitable and sound, hailing what many transportation service providers and attorneys thought was the end of at least one headache in law governing intermodal transportation.
Not so fast, said the Second Circuit in Sompo Japan. The Kirby parties forgot to brief the Carmack Amendment in addressing jurisdictional issues at the High Court’ sua sponte request. Because rail (and by inference motor) carriers aren’t statutorily subject to COGSA, and Carmack is designed to spell out their rights and liabilities for cargo loss/damage, Carmack still applies to them even if they’re the subject of a through bill of lading (at least in the Second Circuit’s northeastern states). While Sompo Japan soon should be up for appeal to (and, presumably, correction by) the Big Nine, we’re left in a bit of a quandary meanwhile.
Why? Several reasons, but a big one is that the incongruity between Sompo Japan and Kirby is giving rise to new law founded on principles that don’t hold up to scrutiny under one or the other precedent. A case in point is the Second Circuit’s November 2008 decision in Rexroth Hydraudyne B.V. v. Ocean World Lines, et al (“Rexroth”), wherein the court struggled to rationalize why COGSA governed an ocean carrier’s and NVOCC’s liability for an inland loss.
In Rexroth, a Dutch shipper booked transit of cargo to consignee TDI in Englewood, Colorado with NVOCC Ocean World Lines (“OWL”). OWL placed the transit with ocean carrier Cosco which, in turn, booked inland carriage from the U.S. point of entry at the Port of Houston to Englewood with the Union Pacific Railroad (the “UP”). Before delivery, the shipper learned of TDI’s financial woes, and directed OWL and Cosco not to deliver the freight. The UP did so nonetheless, TDI went belly up without paying, and the shipper was out some 297 grand.
So what controls OWL’s and Cosco’s liability, COGSA or Carmack? By the Sompo Japan reasoning, one might think Carmack does, as the loss occurred inland. OWL and Cosco essentially provided inland carriage by booking with the UP, didn’t they? Does the fact there also was an ocean leg of this haul spell the difference?
Apparently so. Affirming the Southern District of New York, the Second Circuit concluded that the COGSA-sanctioned $500/package limitation of liability provided by OWL’s and Cosco’s bills of lading applied, because rail carrier liability wasn’t at issue here. The court distinguished Sompo Japan on the ground it only “establishes that Carmack trumps a conflict between itself and a contractual extension of COGSA inland for transports covered under Carmack.” After analyzing a few precedents, the parameters of Carmack’s applicability, and points made in Sompo Japan itself (i.e., finding that some element of cargo handling is necessary for an entity to be an inland carrier), the court concluded that OWL and Cosco were not rail carriers. The analysis is sound, but one subject to counterarguments and possibly different conclusions. In any event, OWL and Cosco, being ocean transportation service providers, can shield themselves from full liability vis-à-vis COGSA.
The UP wasn’t named in the suit. If it had been (as it easily could’ve), would we have two separate liability regimes applied to the same loss? Of course, the UP would qualify as a rail carrier. What if OWL had booked the rail transit separately with the UP, and no through bill of lading existed? What if there had been no ocean component at all? Under Kirby, Carmack clearly would apply in those circumstances, as there would be no question about whether the contract was primarily one of ocean carriage. With Sompo Japan, however, we’re forced to wonder when and under what circumstances the Second Circuit’s determination of mandatory Carmack applicability to surface carrier liability can be “trumped” by the roles of various players. In other words, absent Sompo Japan, the Rexroth fact pattern would obviously be governed by COGSA. With Sompo Japan, we’re doomed to continue with struggles Kirby was designed to avoid.
Ref: Rexroth Hydraudyne B.V. v. Ocean World Lines, et al, 2008 WL 4810069 (2nd Cir. 2008); Sompo Japan Ins. Co. of America v. Union Pacific R. Co., 456 F.3d 54, 56 (2nd Cir. 2006); and Norfolk Southern Railway Co. v. Kirby 543 U.S. 14, 125 S.Ct., 385 (2004).